Selling June and going away sounds pretty good this year, with the TSX Index and S&P 500 both showing signs of fragility. Indeed, investors were a bit panicky when the S&P 500, America’s top index, briefly dipped into a bear market. The 20% fall from peak to trough was vicious, ending the life of the bull market that lasted around two years since the last one ended in the 2020 stock market crash.
Though many investors are prepping for that V-shaped recovery, it’s important to note that we may not get one this time around. The U.S. Fed is ready to deliver more rate hikes, and, depending on the hawkishness of their comments, we could see a lot more volatility in the second half of 2022. It’s all about inflation these days. If inflation cools, the Fed may be inclined to give investors a break. However, until inflation is brought down to much lower levels, the Fed has little choice. They’re between a rock and a hard place these days, and they need to combat inflation for the longer-term health of the economy.
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Inflation could weigh on markets further
For now, there have been subtle signs that have changed consumer behaviour. Nobody likes to have to pay more for the same goods they got just a year ago. As inflation surges higher, there’s a real chance that consumer-facing firms will take a larger hit to the chin. In any case, investors should hang onto their stocks and be on the hunt for bargains if they are in it for the long haul.
Market selloffs are bad for investors who expect to make a profit on a month-to-month or quarter-to-quarter basis. Heck, it may be hard to make any sort of gain over the next 18 months. Still, for those investing for at least five years, selloffs and bear markets are a good thing. They allow investors to top up their favourite stocks.
BCE stock: A popular dividend stock that’s getting pricey
In this piece, we’ll look at dividend heavyweights that can pay you while you ride out the volatile ride that is the market. BCE (TSX:BCE)(NYSE:BCE) is a popular high-yield dividend stock with a juicy 5.4% yield at writing. The stock is off more than 6% from its high, but the valuation looks steep at north of 21 times trailing earnings. Given heavy capital expenditures and the headwind of higher rates, I’d argue that BCE stock should be trading at the high-teens level.
Factor in a lack of growth prospects and a lower-return media business, and it’s apparent that BCE may have limited upside, even in this kind of market. Add in the effect of a pressured consumer, and many may be inclined to cut their mobile budgets considerably.
Enbridge stock: Cheaper with a higher dividend yield
Though BCE may be a great way to score above-average passive income over the next decade, I prefer a name like Enbridge (TSX:ENB)(NYSE:ENB). First, it has the richer dividend yield — currently just shy of 6%. With a 20.2 times trailing earnings multiple, Enbridge stock is slightly cheaper than the likes of BCE.
With solid price momentum and prominent tailwinds in the energy sector, Enbridge seems like the better risk/reward tradeoff, as the chance of recession increases. The energy sector looks incredibly robust these days — so much so that the pipelines are unlikely to crumble as we enter more of a consumer-facing recession. Indeed, midstream operators have less to benefit from higher energy prices than the producers. However, in an era of higher energy prices, the pipelines could be the new stable utility plays.
Yes, higher rates aren’t great for pipelines, but it’s hard to ignore the impact of greater demand for domestic energy, which could last for many years. Could the pipelines beat the telecoms over the next three years? At this rate, they could. In any case, I wouldn’t be afraid to own both as a part of a diversified portfolio this June.
